As I work with clients to help them get out of debt and they are getting close to being debt free (with the exception of their mortgages), they begin to ask questions about the next steps in saving – in other words, they are using existing cash flow to pay off their debt – but once that debt is erased, that cash can now be put to work as they plan for the future. The most common question I get when considering the extra cash they will have is:
What should our savings and investment priorities be?
Here are the priorities I always help them establish and understand:
- Create a 6-9 month emergency fund to give you a little bit of cushion to protect against unforeseen difficulties.
- Make sure that you are fully funding your retirement (401k’s and IRA’s).
- If you plan to help your children with their college educations, start a 529 plan to save money for that purpose.
- Pay off your mortgage by adding extra payments whenever possible.
- Meet with an investment advisor and develop a plan for investing in high-quality mutual funds.
With the right discipline, planning, and execution, you can be financially free – and that is a tremendously FREEING experience.
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